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Will Higher Prices Hurt or Help Netflix in 2022?

Digital media veteran Netflix (NASDAQ: NFLX) just raised subscription prices across North America, marking the third price increase in three years. Will this 11% pricing change trigger a huge wave of canceled subscriptions, or should investors expect the top line to grow without any meaningful loss of subscribers?

Here's what the data from Netflix's previous price increases tells me.

What's new?

The new price increases are remarkably consistent. The most budget-conscious plan now costs $9.99 per month for new subscribers, up from $8.99. The most popular mid-level service fee rose from $13.99 to $15.49 per month. Premium subscribers are now shelling out $19.99 per month instead of $17.99. In every case, these changes work out to an 11% increase.

The new prices are already effective for new signups in the U.S. market. Similar increases have taken effect in Canada. For the 74 million current Netflix subscribers in the United States and Canada reporting segment, the new prices will take effect in phases over the next quarter, following a 30-day advance notice.

Image source: Getty Images.

What's the problem?

Every time Netflix raises its monthly fees, bearish investors worry that the higher prices will scare away subscribers. In addition, Netflix has posted disappointing subscriber addition numbers in recent quarters, as the extraordinary signup boost from the early coronavirus lockdowns was followed by a contraction in 2021.

In this light, the service may look fragile and price-sensitive. This double-digit price increase will surely send subscribers to the exits.

Not so fast. Real-world data from earlier price jumps tells a different story.

2020: A richer price mix

On the heels of the 2020 price increase, Netflix crushed subscriber addition estimates in the fourth quarter of 2020. The company added 8.6 million net new subscribers globally, setting the guidance target at just 6 million for that period. 860,000 of the new names came from the North American segment.

Revenues for this division are running 14% higher in the first three quarters of 2021, compared to the same period in 2020. That's an impressive result, given the fact that the largest price increase was a 13% boost for the Premium plan. The lowest-cost alternative didn't boost prices at all in this round.

In other words, not only did North American customers hang on to their Netflix memberships in the face of rising prices and vaccine-powered coronavirus normalization, but many of them appear to have upgraded their service to higher-priced plans.

2019: A larger increase

The 2019 price increase was billed as the most substantial price increase in Netflix history. Price increases ranged from 13% in the most basic plan to 18% for the mid-tier option. The top-shelf plan landed in between these extremes with a 14% price boost.

This price change started to take effect in May 2019. This audacious fee jump did trigger disappointing subscriber metrics over the next two quarters, but the positive effect on plan choices made another appearance. In the third quarter of 2019, average revenue per subscriber rose 16.5%, as compared with the 2018 result. All told, North American revenues increased by 21% in 2019, even though none of the monthly fee increases rose that high.

So it looks like Netflix lost some of its most price-sensitive members in lower-tier plans, but the higher-priced plans with better video quality and more concurrent streams seem to become more popular with every price increase.

Image source: Getty Images.

What's next?

The decision to raise prices in January is probably giving us hints about Netflix's upcoming fourth-quarter report. The last time the company lifted subscription prices in January, the move was paired with record-breaking subscriber additions in the holiday quarter of 2018. Yes, that was the aforementioned "biggest price increase in history."

Netflix seems to pick its spots with care, taking big pricing steps only when the underlying business trends are strong enough to support it. Therefore, I expect a positive subscriber surprise in Tuesday's fourth-quarter report, and I see the North American revenue line turning sharply upward in 2022. And the growth story continues, even if a few people decide to drop their lower-tier Netflix plans this year.

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Anders Bylund owns Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.


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